What is a Qualified Intermediary? | 1031 Exchange

A 1031 Exchange is a real estate investment strategy utilized to defer paying capital gains taxes on the sale of an income property. A 1031 exchange can be your best friend if you intend to continue to use real estate as an investment, but may want to make some changes to your portfolio. This loophole allows you to transfer the tax liability of your relinquished property to the new like-kind replacement property or properties. 

A 1031 Exchange is not a do-it-yourself endeavor. If you are thinking about using this incredible tax deferral strategy, a Qualified Intermediary is essential. 

What is a Qualified Intermediary?

Also known as an Accommodator or Exchange Intermediary, a Qualified Intermediary (QI) is a third party that helps facilitate lawful, equitable and timely 1031 Exchanges. The process of a 1031 exchange is quite simple and easy to follow, but the rules can be complicated and filled with pitfalls. Because of that reason investors often find it hard to navigate through the process of a 1031 exchange. A competent and experienced QI can make the whole exchange process smooth and stress-free, and can save you from paying a ridiculous amount of taxes from a failed exchange.

What does a Qualified Intermediary do?

A qualified intermediary will serve in numerous capacities during a 1031 exchange:

1. The IRC requires that the exchanger must assign their interest as a seller of the relinquished property or their interest as the buyer of the replacement property to the exchange intermediary. For this, the QI becomes an actual principal in the exchange, and a reciprocal trade is created. Even though it is the investor that is buying and selling, the QI ensures an arms-length transaction, expressly limiting the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain benefits of money from the exchange.

2. The Qualified Intermediary holds the funds for the investor. The investor is not allowed to have any actual or constructive receipts of the proceeds from the sale of the relinquished property. The Qualified Intermediary holds the funds until the 1031 Exchange is complete.

3. Another important role that the qualified intermediary plays in a 1031 exchange is preparing the proper documents for the investor. 

Who to hire as your Qualified Intermediary?

The rules and regulations of section 1031 of the IRC can be quite vague and hard to understand. Hiring a competent and experienced exchange intermediary is important for a successful 1031 exchange completion.

The investor should be picky in choosing a Qualified Intermediary for their 1031 exchange because the success of this tax deferral strategy depends on the QI’s competency. The most important qualification should be their ability to understand the tax code thoroughly and communicate that with the investor. They should also pay close attention to the safety and security methods used by the intermediary in handling the exchange funds.

Someone who has acted as the taxpayer’s employee, attorney, investment banker or broker, or real estate agent within the two years of the exchange disqualifies them from being an eligible intermediary.

If you are a real estate investor seeking the help of a QI, I would be happy to connect you to our vendor network! Contact me below for a referral.